Edited version of private ruling

Authorisation Number: 1011711674893

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Ruling

Subject: Capital gains tax - Deceased estate, main residence and life tenant

Question: Do you include your share of the net capital gain made by the trust in your assessable income?

Answer: Yes.

This ruling applies for the following period<s>:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Person A and Person B were a married couple. Two children were born of their marriage.

During the 1970s, they purchased a property (the property) as joint tenants.

In the early 1980s, their marriage broke down.

Shortly afterward, the marriage was dissolved, however, the property was still under legal proceedings.

The following year, Person A passed away and left their assets to the two children in equal shares whilst the issue of the property was still under the legal proceedings.

Some years later, the Family Court ordered that the property be transferred from Person B's name to the names of two persons who would hold the property on trust for Person B and the two children on terms outlined in the annexure to the Court order. The Family Court also ordered that Person B was to have a life interest in the property and have the right to occupy the property for their lifetime.

Pending that transfer, the Family Court declared that Person B held a half share of the property on trust for the benefit of Person A's estate.

The property was subsequently transferred from Person B to the trustees for no consideration.

The trustees held the property in trust for Person B and the two children (who were at the time under the age of 18 years). The trust deed specified that upon Person B's death, the trustees are to hold the property in trust for the children with each to receive equal shares.

Person B passed away recently having resided in the property from purchase until death. The children are also the beneficiaries of their Will.

The property has never been used to produce assessable income.

Valuations for the property were given as at the time of transfer into the trust and Person B's death.

The trustees will dispose of the property in the recent income year making a capital gain from it (although the amount has not been determined). The property is the only trust asset.

The proceeds from the disposal of the property (including the capital gain) will be distributed to the two beneficiaries (including you).

You have supplied certain documentation related to Family Court order and copies of the will of Person A and Person B to support your application and this documentation is to be read with and forms part of the scheme for the purpose of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 108-5
Income Tax Assessment Act 1997 Section 109-5
Income Tax Assessment Act 1997 Section 112-20
Income Tax Assessment Act 1997 Section 118-110
Income Tax Assessment Act 1997 Section 118-195
Income Tax Assessment Act 1997 Section 126-5
Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

You include your share of the net capital gain made by the trust in your assessable income.

Detailed reasoning

The term capital gains tax (CGT) asset is defined in broad terms. As a result, where property is held by a trust, each interested entity will independently own a CGT asset. The trustees will hold the property as a CGT asset and the beneficiaries will hold interests in the trust as their CGT assets.

It is important to consider which of the separate CGT assets is being affected by a transaction when determining whether there is a capital gains tax liability and to whom.

In your situation, the transaction is the sale of the property by the trustees. This will generate a capital gain to the trustees due to CGT event A1 (disposal of a CGT asset) happening that they will partly distribute to you.

CGT event E5 (about a beneficiary becoming absolutely entitled to a CGT asset) will not happen due to Person B passing away as there are two remainder beneficiaries of the trust and the property is not an easily divisible asset.

You include a capital gain distributed to you by a trust in your assessable income unless the gain is disregarded.

Note: A capital loss cannot be distributed to a beneficiary by a trust. It is quarantined within the trust.

Exemption from capital gains tax

The capital gains provisions provide a number of exemptions including:

· an exemption for pre-CGT assets, and

· a main residence exemption.

There is a general exemption where a CGT event happens to a CGT asset that was acquired before 20 September 1985 (also known as a pre-CGT asset).

Generally, the acquisition date is related to the date that a CGT asset becomes legally owned by an entity. However, an earlier date may be substituted as the acquisition date if a roll-over applies.

The trustees have acquired the property due to the transfer to them from Person B in accordance with the order of the Family Court. This occurred after 20 September 1985, so prima facie the property was not a pre-CGT asset in the hands of the trustees.

A roll-over may apply when a marriage breaks down, but only to transfers between the parties to the marriage. This roll-over is not available in your case.

An exemption may also be available where a CGT event happens to an entity's interest in a dwelling that was someone's main residence.

Basic entitlement to the main residences exemption is limited to certain types of entities. They are individuals, trustees of deceased estates and beneficiaries of deceased estates.

The trust that was created as a result of the Family Court order is not a trust created by the will of a deceased person and therefore not a type of entity that can qualify for any main residence exemption.

For this reason, it will not matter whether the trustees sell the property within two years of the date that Person B passed away. (In any event, the two year period would only be relevant for an asset that Person B owned when they died. They did not own the property, only an interest in the trust as beneficiary.)

Note: This ruling does not consider whether or not there would have been an exemption due to a CGT event happening to any of the other CGT assets.

Calculating the amount of the capital gain

The trustees will make the capital gain and then distribute it to the beneficiaries (including you).

The amount of the capital gain is worked out by subtracting the cost base of the property from the capital proceeds received from its sale. Neither amount is yet known as the property is yet to be sold.

However, the first element of the cost base of the property in the hands of the trustees will be its market value calculated as at the date of the transfer to them by Person B.